How to Use Debt to Your Advantage

There is only one way for Millennials, or anyone else, to make credit card debt work in their favor: Pay it down and eliminate it. Well, sort of. Just like cholesterol, some debt is good for you.

As of the third quarter of 2017, Millennials stared down $808 billion in U.S. credit card debt and $1.36 trillion in student loan debt, according to the Federal Reserve Bank of New York. The average college graduate is carrying more than $37,000 in student loan debt, according to college and scholarship site Cappex.

That debt has been especially tough for Millennials to repay. The Bureau of Labor Statistics puts the overall unemployment rate at 4.1%, but that rises to 7.2% for adults ages 20 to 24 and 14.5% for those ages 18 and 19. Yet Joe O'Boyle, a financial advisor with Voya Financial Advisors in Beverly Hills, Calif., told us a while back that many younger clients come to him completely misinformed about how to handle their credit card debt.

"So many Millennials come into my office with credit card debt or credit card balances and they say 'I don't want to pay it off in full because I'm trying to build my credit," he says. "They don't understand that they're supposed to pay it off in full every month so they don't accumulate interest."

As O'Boyle points out, the FICO score used by credit bureaus to determine the health of one's credit values on-time payment and low balances above all else. The combination of a spotless payment history (35% of a FICO score) and the amount of debt a cardholder carries in relation to their credit limit (meaning a credit utilization of up to 30% of available credit) account for nearly two-thirds of a person's overall credit score. If you never miss a payment, but use $9,500 of your $10,000 credit limit, you're still tarnishing your credit and making it harder to lease a car or mortgage a home.

Can You Use Credit Card Debt to Your Advantage?

In fact, the only time credit-card debt is "good" is when it's on a low-interest card that Millennials or anyone else can pay off quickly, a CreditCards.com survey found that those who fall behind in credit card payments face an average penalty rate of 28.45%.

However, if you have $5,000 outstanding on one of your existing credit cards, transferring to a card with a 0% annual percentage rate (assuming a 3% balance transfer fee and a 12-month 0% introductory APR) would let you pay that off within a year for $5,150. That's not as great as $5,000, but someone paying a 28.45% penalty rate would have to pay $5,803 over 12 months to pay off that same $5,000 -- or $653 more. Even if you're carrying a standard 15% APR, it would cost $5,415.48 to pay off that balance. That's still $265 more than the 0% offer.

"Hopelessness can be paralyzing," says Matt Schulz, industry expert for CreditCards.com, "but the reality is that people have more power of their debt than they realize. The most important thing is simply to take action -- even small ones -- to start knocking that debt down."

Even opening another credit card account you'll never use can help. If you're using $2,500 of your $5,000 available credit, but can somehow open an account with another $5,000 in available credit, you'll trim your credit utilization score from 50% to 25%. Assuming you can avoid using that newfound credit until you've paid off your old debt, it should help your case considerably.

"Credit card debt is like an invasive plant that can quickly get out of control if you don't take care of it," says Kimberly Palmer, personal finance expert at NerdWallet.

A NerdWallet survey found that 40% of Americans are looking to tackle debt in 2017, with 23% looking at their credit-card debt specifically. However, NerdWallet notes that 10% -- including a whole lot of Millennials -- would rather focus on their average of $17,000 in student loan debt first. Palmer says this is incredibly unwise, as credit-card interest is 2.5-times higher than student loan interest. It would require just 10 years to pay $17,000 in student loan debt, but 19 years to pay off the same amount of credit card debt.

Instead NerdWallet suggests starting with the average $6,081 in credit card debt carried by each U.S. cardholder with an outstanding balance. It would take 14 years and an additional $4,000 in interest to pay it off with bare-minimum payments, but paying it off completely by the end of the year would cost $457 a month.

John S. Kiernan, senior writer and editor at credit and finance site WalletHub, suggests paying down 20%. If you can transfer that debt to a credit card offering 0% interest for at least 12 months, it'll cost less than $150 a month and reduce the amount of interest you'll have to pay overall.

"The sooner you can reach debt freedom, the better off your wallet will be," Kiernan says.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.